Home shoppers can kick off the mortgage process with a loan prequalification. As the first of several steps in the mortgage application, the lender will provide an estimate of how much they may be willing to lend you. 

Prequalification is a useful tool to ensure you are shopping for homes within your price range. Here’s how to prequalify for a home loan as a first-time buyer.

Ready to get prequalified? Click here to start (Sep 16th, 2024)

What is prequalification?

Prequalification is an estimated amount a lender may be willing to loan you. The ballpark estimate is based on the information that you provide. Unlike a preapproval, you typically don’t need to supply financial documents for a prequalification, so it’s a quick and easy way to estimate your home buying eligibility.

How to prequalify for a home loan as a first-time buyer

If you want to prequalify for a home loan as a first-time buyer, the process might seem daunting. The good news is that’s a relatively straightforward step. 

Generally, you’ll answer a few questions through an online form or by phone. Afterward, the lender may issue a prequalification that includes a maximum loan amount and potential interest rate for your loan. 

It’s important to note that a prequalification offer is not binding. Instead, it’s subject to a further review of your financial details.

What’s the advantage of getting prequalified for a home loan?

Strictly speaking, it’s not necessary to get a prequalification. But if you skip this step, you might regret it. 

Although not a binding loan offer, a prequalification is very useful for home shoppers. The amount outlined in the letter can help you determine a realistic budget for your future home. With a prequalification, you’ll understand how much house you can actually afford based on your savings, credit score, and today’s interest rates. 

When kicking off your home search, understanding a realistic purchase price is critical. Otherwise, you could start your search looking for homes well above what you can realistically afford.

Ready to start home shopping? Start here (Sep 16th, 2024)

Prequalification vs preapproval

At some point during the home buying process, you’ll come across the terms prequalification and preapproval. Although some use these words interchangeably, they don’t mean the same thing. 

When you pursue a prequalification, the lender makes a decision on self-reported information. 

But when you apply for a preapproval, the loan officer will verify all of your information. During the process, a lender will verify your income, run a hard credit check and review all of the required supporting documents. With a better handle on your information, it’s easy to see why a preapproval carries more weight in the eyes of a seller. 

Neither a prequalification nor preapproval guarantees you a mortgage. But a preapproved buyer does have stronger footing. With that, many sellers are only willing to consider preapproved buyers.

Step-by-step guide to getting prequalified for a home loan

Ready to get prequalified? Here’s what you need to do:

• Gather your information: Collect your financial details including your income and credit score. 
• Research mortgage lenders: Check out who’s offering the best rates. You don’t want to overpay for this major purchase. Also, explore the types of mortgages you may want to pursue. 

• Complete an online prequalification process: Many lenders have an online form that requires the answers to several questions about your finances. Be prepared to provide information about your address, employment, income and more. 

• Use your prequalification as a guide: If you prequalify, use the possible loan amount as a guide for your home hunt. 

Note that prequalification is typically free and you’re not in any way bound to the lender you get prequalified with. So don’t worry that you’re making a final decision when you get prequalified; you can still shop around for lenders and rates before you make a final loan application.

Step-by-step guide to getting preapproved for a loan

A preapproval holds more weight when pursuing homeownership. That’s because the lender has verified the details of your financial information. Here’s how to get preapproved. 

• Gather your documents: A loan preapproval requires a suite of documents to confirm your financial details. Be prepared to provide W-2s, tax returns, pay stubs, proof of funds for your down payment, and your Social Security Number. 
• Find the right mortgage lender: It’s important to shop around for a preapproval. You’ll want to work with a reliable lender that offers attractive rates. 

• Submit the documents: The mortgage lender will require a copy of your financial documents. Be ready to answer any questions that pop up. 

• Use your preapproval letter: When house hunting, make sure to look at houses within your approved price range. If you are ready to make an offer, let the real estate agent know that you are preapproved. 

Requirements for pre-approval

If you want to secure a mortgage preapproval, the underwriting requirements vary a bit based on the loan type. But in general, here’s what you need:

• Proof of income: The lender wants to make sure that you can keep up with the monthly mortgage payments. Typically, this is in the form of a W-2, pay stubs or tax returns. 
• Proof of assets: At the very least, you’ll need to have enough cash on hand to cover the down payment and closing costs. Typically, you’ll need to provide bank statements to prove your eligibility. 
• Good credit: You can obtain an FHA loan with a credit score as low as 580. But a conventional home loan requires a minimum credit score of 620. A lender will check your credit report before providing a preapproval. 
• Employment verification: A lender wants to ensure your income is reliable. If you are self-employed the lender will want to learn more about your business. 
• Other documentation: Lenders will need your Social Security number, address and more to verify your information. 

First-time home buyer FAQ

Does a prequalification hurt your credit?

A mortgage prequalification should not hurt your credit. Depending on the lender, they may ask for a self-reported score or run a soft credit check. In either case, your credit score shouldn’t be impacted. 

How do I prequalify for a mortgage?

In order to prequalify for a mortgage, you’ll need to answer a series of questions posed by your lender. Be prepared to provide details on your income, employment history, and credit score. If the lender likes what they see, you’ll receive a prequalification letter. 

What’s the difference between prequalification and preapproval?

A preapproval involves significantly more documentation. Instead of relying on self-reported information, the lender will require documentation of your credit score, income, assets, and more. 

What factors are considered for preapproval?

During the preapproval process, lenders consider your credit history, credit score, income, assets, and debt-to-income ratio (DTI). The lender will use this information to determine how much it is willing to lend you for your new home purchase and estimate what mortgage rates they can offer. 

Why is it important to get preapproved?

Getting preapproved can help you determine an appropriate budget for your real estate search. Additionally, sellers often give preference to buyers with a preapproval in hand. 

Beyond budgeting while home shopping, a preapproval gives future homeowners a realistic look into the affordability of a home purchase. You’ll be able to learn more about the loan term options. Plus, ensure that your monthly income can comfortably support your expected mortgage payment.

Which loan option is best for first-time home buyers?

The right loan type for first-time home buyers depends on their unique situation. In some cases, government-backed loan programs are the right move. 

The FHA loan is a good option with more lenient credit requirements and a minimum down payment of 3.5%. But as a veteran or military member, the VA loan might be a better fit with a 0% down payment requirement. 

Finally, some buyers with excellent credit will find the most benefits from a conventional loan. The down payment can be as low as 3%. But you’ll face stricter credit requirements. Keep in mind that a down payment lower than 20% means you’ll have to pay mortgage insurance. Although not uncommon, it’s important to factor this cost into your budget. 

What credit score is needed for first-time buyers?

The credit score required for first-time buyers varies based on the mortgage loan type. Some FHA loans provide funding to borrowers with credit scores as low as 500, conventional loans require a credit score of at least 620, USDA loans require a credit score of at least 640 and VA loans don’t have a set credit score requirement. 

Ready to get prequalified? Click here to start (Sep 16th, 2024)